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  • richard evans

USD up post-FOMC, GBP vulnerable

Good morning

So not a surprise that the Fed raised rates 75bps, taking it to 3.25%, the highest level in 15 years. To be honest I had thought they’d push for 1%. Regardless, the fact that rates are now seen at around 4.4% by year end, compared with 3.4% at their last forecast in June, and then on to 4.6% in early 2023, has given USD another push higher. The 4.4% rate by year end would suggest something like 75bps rise at the 2nd Nov meeting, and another 50bps rise at the 15th December meeting, although the Fed will be watching data between now and then. The risks must be for an even higher rate by year end.

Make no mistake, when faced with the choice of fighting inflation or helping economic growth, the Fed are clearly in ‘fight inflation’ mode. Powell did acknowledge the downside risks to economic growth and indeed their downside revisions to GDP forecasts and upside revisions to the unemployment rate show the Fed are well aware of the risks. Back in June, 2022 GDP had been forecast to be around 1.7%, this has been cut to just 0.2%. It’s a cost they seem to be willing to bear.

The hawkish tilt to the Fed meeting sent USD higher with many currencies hitting levels not seen for quite some time. EURUSD has been down to 0.9810, lowest for 20 years, GBPUSD to 1.1220, the lowest level since 1985, USDCAD to 1.3540, highest since July 2020. Gold traded a $30+ range after the announcement, down to $1653, then up to $1688, but is now back to the lower end of that range, just below $1660. Despite these levels the signs are clearly for a higher USD still.

BoJ meanwhile kept their policy unchanged, and with no talk of controlling yen weakness we have seen USDJPY trade up to 145.40, another new high. With little mention of the level of yen, the door looks open for a move higher. August 1998 high around 148.00 next up, then 150 and perhaps a test of the 1990 highs around 160.00 is a fair target.

We are expecting to see a 75bps rise by SNB this morning as they also weigh up high inflation against downside growth risks.

Focussing on GBP, BoE will be announcing their latest policy changes at midday. 50bps rise seems to be the favourite for now, but forecasts range between 25bps and 75bps and it will be interesting to see how the voting has panned out. A 50bps rise is unlikely to offer support for GBP and it is unlikely the BoE will follow Fes thinking in the inflation vs growth risks battle. Truss’s recent plans to reduce energy prices could see UK inflation forecasts well below previous BoE estimates which will hardly encourage them to push rates higher.

I continue to look for further downside in GBPUSD and look for trade structures to reflect this. Call for details, 1.10 here we come?

- 08.30 SNB rate announcement

- 09.00 SNB press conference

- 09.00 EU ECB monthly bulletin

- 12.00 BoE rate announcement

- 13.30 US initial jobless claims

- 15.00 EU consumer confidence

- 16.00 BoEs Haskell speaks

- 00.00 AUS S&P manufacturing PMI

- 00.01 UK GfK consumer confidence

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